The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

The American left has worked itself into another one of its frenzies about income inequality. This one has been triggered by a French economist named Thomas Piketty, whose new book, Capital in the Twenty-First Century, argues that capitalism "automatically generates arbitrary and unsustainable inequalities" in times like ours because "the rate of return on capital exceeds the rate of growth of output and income."

Let's step back and stipulate that it's a noble and worthy policy objective to expand economic opportunity for those who least have it. But here's the thing: The way we talk and think and write about economic inequality is, shall we say, impoverished.

Nearly all the debate about inequality centers on income. We talk about the average income of those in the top percentile of annual earners in the U.S., say, and how that figure has increased or decreased over time. But the distribution of annual income tells us very little about how low-income people fare.

Focusing on income—while ignoring the impact of taxation and transfers—prevents us from understanding how existing efforts at redistribution are mitigating the degree of income inequality in society. Kevin Hassett of the American Enterprise Institute has shown that in the U.S. transfer payments as a percentage of gross domestic product have increased from 6% in 1970 to 12% in 2008. As a result, the share of goods and services consumed by the bottom income quintile, as compared to the top quintile, has remained relatively constant.

The second problem with focusing on income is that income is not the same thing as wealth. For example, a young doctor living in San Francisco who immigrated to the U.S. from Cambodia may be making six figures, but he's using a good chunk of that money to pay off his student loans, his tax bills and his rent. Our doctor is a HENRY: a High Earner who's Not Rich Yet.

The third problem with overemphasizing income inequality is that it ignores the degree to which high cost of living drives inequality. In a place where housing and food are cheap and plentiful, lower incomes can provide a sustainable living. Not so in places where these basic goods are costly, like New York City and the typical European capital. What's the biggest driver of the high costs of goods and services? Bad government policy: restrictions on housing stock, agricultural protectionism, costly labor regulations and the like. Indeed, as Hassett shows, soaring housing prices account for much of the so-called capital growth that Piketty finds distasteful.

But the most important problem with talking only about income inequality is it focuses on relative income to the exclusion of absolute income. As Winston Churchill once put it, "The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of miseries." Is it really so great to live in a country where everyone is equally poor? Or is it better to live in a country with some income inequality, where those with low incomes have adequate food, shelter and opportunity?

Let's say we wanted to be thoughtful about addressing the problem of economic inequality. How would we do it? We'd want to do everything possible to reward activities that promote economic growth. We'd want to lower the cost of living for as many people as possible, by reforming health care, mortgage finance and college tuition. And we'd want to finance our safety net by slashing taxes on income and replacing them with taxes on consumption (sales or value-added taxes) and wealth (property taxes).

Though their costs of living remain high, countries like Switzerland and Singapore have employed this approach with spectacular results. You wouldn't know it, though, by listening to those who talk the most about inequality, Piketty included.